The controversy in France earlier this year about pension changes is old news, but the wobbly financing that undergirds the U.S. and European welfare states remains a real-time problem. Americans should learn from the French controversy, because a similar day of reckoning lies ahead for the U.S. entitlement state. By some measures, in fact, the United States is in worse shape.
The French imbroglio was triggered by President Emmanuel Macrons decision to raise the countrys retirement age from 62 to 64, and to require most workers to contribute for additional years into the pay-as-you-go government pension program, similar to the U.S. Social Security system.
French trade unionists, socialists and students erupted with violent protests, with a majority of the public going beyond the immediate controversy and starting to question virtually every aspect of Macrons presidency. The French president was forced to use special constitutional powers to push through the reform in the National Assembly.
Now that the frenzy has somewhat died down, its time to get to the fundamental problem: the fact that the traditional European-style welfare state embraced by France, Italy, Greece, Germany and the rest of old Europeconceived toward the end of the 19th century by Otto von Bismarck, first chancellor of unified Germany, and molded into the modern tangle of today by the progressive British economist and social reformer, William Beveridge, at the end of World World IIis no longer viable.
The French in particular (where some on the right of the political spectrum sometimes seem more socialist than those on the left), and Europeans and Americans more generally, need to understand some basic economic truths: 1) that you cant turn every desire into a right; 2) you cant live at the expense of others while others want to live at your expense, and 3) you cant endlessly delegate to others the responsibility of paying for your medical care, unemployment benefits, and old-age pension when the number of people demanding benefits is increasing and the number supporting the system is decreasing.
Thats the case throughout old Europe, and in the United States, where the combination of baby boomer retirements, increased longevity, and declining birth rates has revealed the innate fragility of the social-welfare state.
Though a number of European governments began to reform their pension systems, starting in the 1980s, most have done so only timidly. France is one of the countries that adopted half-measures and it is now paying the price. Despite ample warnings, most U.S. politicians continue to ignore the looming crisis.
Government pensions are only part of the problem. More broadly, France, like the United States, has a longstanding spending and debt problem, with a national debt of almost 3 trillion euros (about $3.3 trillion). France has had a debt problem for years; even before the Covid-related spending spikes of 2020 and 2021, the countrys debt had exceeded 90% of GDP every year for the past decade. As a result, France now pays more interest on its debt than it spends on either defense, health or pensions.
The debt persists because government spending annually swallows up almost 60% of what the economy produces, the highest level in the world (along with Greece). The elephantine size of Frances government is the reason for the brutal level of taxation its citizens suffer, with taxation on wages 12.5 percentage points higher than the Organization for Economic Cooperation and Development (OECD) average. This situation is untenable.
By comparison, the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden), admired in the United States for their high levels of social-welfare protection, spend less than France because theyve been serious about reforming their welfare statesrealizing theres a limit to wealth redistribution. In Sweden, for example, government spending in 2022 as a percentage of gross domestic product (GDP) was about 20% lower than it was in France. Thats a huge difference.
If theres one thing that can be said for Macrons reform effort, its that its a step in the right direction. But its clearly not enough. In the absence of a system in which retirement benefits are fully funded, rather than depending on current workers paying for the promises made to previous employees, it will take a lot more than extending the retirement age to balance the accounts.
Lets hope Macrons decision will at least have had the merit of focusing the minds of both Europeans and Americans on the future of their unviable welfare systems, a central issue of our time.